Some Memories Are Too Cheap for Their Own Good

In a world where electronic gadgets can outnumber people, it is hard to imagine demand for memory chips waning -- and perhaps that is the problem. Flash memory maker SanDisk Corp. (Nasdaq: SNDK) reported in a statement last week that it expects to miss its first-quarter estimates, which triggered a selloff that saw the value of its shares drop more than 10 percent in one day. Experts say memory chip manufacturers have typically seen some seasonal softness early in the year, and this time the industry looks ripe for some consolidation.

SanDisk blamed lower prices and weaker demand when it lowered its first-quarter revenue estimate to $1.2 billion from the previously projected $1.3 billion to $1.35 billion. Furthermore, the company said its total gross margin would be below the 39 to 42 percent range it had once expected, but was not more specific.

SanDisk plans to give more details during its quarterly earnings call scheduled for April 19. However, investors wasted no time showing their displeasure. Shares of SanDisk plummeted on April 4 to close at $44.51, down from the April 3 close of $50.05. The decline continued with shares closing at $41.96 on April 11.

Though flash memory is vital for tablets, smartphones, and other popular gadgets, demand typically withers in the first quarter, according to Thomas Coughlin, founder of data storage consulting firm Coughlin Associates. Aside from consumer spending slowing after the winter holidays, businesses tend to hold off on new purchases of electronic equipment until later in the year.

While this supply and demand cycle is not new, Coughlin told me there has also been a buildup of factories that produce semiconductor components such as memory chips. The swelling output of memory precipitated a faster than expected drop in prices, he said: “You have two [factors] coming together, so it tends to be worse than it might be otherwise.”

Faced with high volumes of inventory and less demand, memory chip makers must scramble for ways to compete. However, the almost generic sameness of these chips makes it difficult for any company’s products to stand out. “There are not a lot of differentiators, so you basically fight it on price.”

That may mean a period of attrition awaits makers of flash memory and products built from them such as solid state drives for computers. “There are more than 180 companies that make solid state drives, and I expect that to decline quite a bit,” Coughlin predicts.

Some consolidation is already underway. SK Telecom (Nasdaq: SKM), part of the SK Group conglomerate, in February completed its acquisition of memory chip maker Hynix, now named SK Hynix. Other consolidation deals may be in the works as the landscape grows bleak. Elpida Memory Inc. in Tokyo filed for bankruptcy in February, and though the company is reorganizing, rumors have pointed to Micron Technology Inc. (Nasdaq: MU) as a possible buyer. Micron did not respond to requests for comment on that speculation.

In a way, the memory chip industry may be a victim of its own efficiency. Coughlin notes that advances in manufacturing make it possible to make increasingly smaller chips. That allows for the creation of smartphones and tablets packed more densely with memory but at lower prices per gigabyte. With less cash coming in, memory chip makers like SanDisk will have to carefully weigh their options to thrive in this climate. “I expect in the next few years we’ll see some additional consolidation among manufacturers of flash memory,” Coughlin says.